INVESTMENT HIGHLIGHTS

• Upper bound of our expectations, with strong NII and NOII growth, while cost contained

• NIM dipped in 3QFY17 due to compression in Indonesia but overall improved. Couple with robust gross loans growth, contributor to NII growth

• Slight uptick in GIL ratio but overall asset quality stable due to lower impaired loans in Malaysia

• Strong CASA expansion

• Capital seemingly well buffered for MFRS 9

• Maintaining FY17 forecast

• Optimism on the Group remains especially on the expectation of better loans growth and NIM next year. Reiterate BUY with unchanged TP of RM7.10, based on 1.3x PBV on FY18 BVPS

Upper bound of expectations. The Group posted 9MFY17 net profit growth of 26.0%yoy to RM3.42b. This was at the upper end of our expectations at 80.7% of our full year estimate. Comparing to consensus, the earnings were 75.9% of FY17 expectation.

Solid income expansion continued to be a contributor. NII and NOII continue to be solid in 3QFY17 leading to an overall 9MFY17 growth of +11.7%yoy and +11.2%yoy respectively. NIM improvement was a major factor for the NII expansion, in combination with strong loans growth, especially in mortgages. For NOII, growth was due to forex gains (>100%yoy to RM1.1b) and net fee income (+16.5%yoy to RM1.60b).

Strong gross loans growth despite recalibration. Gross loans expanded +7.0%yoy to RM325.8b. The strong performance was despite the recalibration of commercial loans in Thailand and auto loans in Indonesia where, in local currency terms, gross loans grew +0.1%yoy and +2.7%yoy respectively. Meanwhile, loans in Malaysia and Singapore rose +8.5%yoy and 7.7%yoy respectively. Mortgages were the main contributor to the strong growth. This segment expanded strongly across the Group's home markets, except Singpore, to register +11.1%yoy growth to RM85.8b. Commercial Banking and Wholesale Banking loans grew +8.6%yoy to RM43.0b and +6.7%yoy to RM113.6b respectively.

Uptick in GIL ratio due to weakness in Thailand and Indonesia. There was a +0.3ppt yoy uptick in GIL ratio. Impaired loans were +15.5%yoy higher to RM11.3b, where the bulk came in Indonesia and Thailand with an increase of +4.4%yoy and 54.5%yoy to RM4.0b and RM2.5b respectively. This was due to the corporate and commercial segment in both countries. However, Malaysia's asset quality continued to improve with impaired loans coming in lower at -6.6%yoy to RM3.67b.

Credit cost within guidance. It seems credit cost is normalising where it was -6bps qoq for 3QFY17. Overall, 9MFY17 credit cost was within management's guidance. In fact, it was better on a sequential year basis which suggest that situation is improving. Indonesia is expected to see gradual improvement with credit cost around 200bps. Meanwhile, there is pocket of weakness in Singapore due to remnants from the Oil & Gas sector but it is not a significant contributor at Group level.

Deposit growth was led by CASA. Deposits came in +4.5%yoy higher to RM354.0b. From Wholesale Banking, deposits fell -4.0%yoy to RM142.3b while Commercial Banking deposits was flat at +0.4%yoy to RM45.3b. Consumer Banking deposits moderated the weakness elsewhere as it grew +14.3%yoy to RM166.4b. CASA expanded +8.5%yoy to RM125.6b led by Malaysia (+12.4%yoy to RM67.2b), Indonesia (+4.7%yoy to RM31.3b) and Singapore (+31.1%yoy to RM16.0b). However, Thailand remained on a decline (-26.3%yoy to RM8.4b).

Capital seems to be ready for MFRS 9 next year. The Group’s CET1 ratio had been on a rising trend. It stood at 12.0% as at 3QFY17, from 10.9% as at 3QFY16. We believe that the Group are cushioning against the impact of MFRS9 implementation. We opine that capital is sufficiently buffered at current juncture.Management guided that there will be a slight drop in CET1 on Day One of implementation of approx. 50bps but will subsequently recover, partly via utilising the regulatory reserve. Also, based on our previous discussions, management does not expect credit cost to be significantly different from present levels.

FORECAST

We maintain our FY17 earnings estimate but tweaked slightly our FY18 forecast upwards by +0.5% upwards to reflect the impact from the probable OPR hike.

VALUATION AND RECOMMENDATION

Overall, it was another quarter of good results for the Group. We were pleasantly surprised by the resilience of gross loans growth, which contributed to the growing of NII. We also like the fact that expansion in its CASA franchise continue to be robust. We expect that gross loans may accelerate further in FY18 and NIM may further improve due to the probable OPR hike, which would have a positive impact on earnings. As such, we reiterate our BUY call with unchanged TP of RM7.10. Our TP is based on pegging its FY18 BVPS to 1.3x PBV.

Source: MIDF Research - 29 Nov 2017